LSI Industries Inc. Reports Operating Results (10-Q)

LSI Industries is an Image Solutions company combining integrated design manufacturing & technology to supply its own high quality lighting fixtures and graphics elements for applications in the retail specialty niche & commercial markets. The Company's Lighting Segment produces high performance products dedicated to the outdoor architectural outdoor indoor architectural indoor and accent/downlight markets. The Graphics Segment provides a vast array of products and services including signage menu board systems active digital signage decorative fixturing design support engineering & project management for custom programs for today's retail environment. The Company's Technology Segment develops and designs high performance light engines digital signage and other products using LED lighting technology including large format LED video screens for the entertainment & sports markets. LSI's major markets are the petroleum convenience store multisite retail & the commer Lsi Industries Inc. has a market cap of $170.5 million; its shares were traded at around $7.09 with a P/E ratio of 709 and P/S ratio of 0.7. The dividend yield of Lsi Industries Inc. stocks is 2.9%. Lsi Industries Inc. had an annual average earning growth of 8% over the past 5 years.

Highlight of Business Operations:

First quarter fiscal 2010 net sales of $67,676,000 and operating income of $2,497,000, as compared to the first quarter of fiscal 2009, were favorably influenced by increased net sales and operating income of the Graphics Segment (up 4.5% and 32.5%, respectively), and the addition of the Electronic Components Segment (effective with the July 22, 2009 acquisition of AdL Technology, which added $3.2 million and $0.1 million of net sales and operating income, respectively). Operating results were unfavorably influenced by decreased net sales and operating income of the Lighting Segment (down 20.1% and 22.0%, respectively), as well as decreased net sales and operating income in the Technology Segment and All Other Category. Net sales to the Petroleum / Convenience Store market, Company s largest niche market, were $20,965,000 or 31% of total net sales and $15,199,000 or 20% of total net sales in the first quarters of fiscal 2010 and 2009, respectively. The $5.8 million or 38% increase is primarily due to a program with one national petroleum / convenience store customer who is replacing traditional canopy, site and sign lighting with solid-state LED lighting ($6.3 million increase) and a net decrease in net sales to other customers in this niche market ($0.5 million decrease). Over 60% of the retail sites scheduled to be involved in this customer s program to convert to solid-state LED lighting are expected to be completed in the Company s 2010 second fiscal quarter, and the Company is in discussion with this customer regarding additional retail sites to be converted in calendar year 2010.

Lighting Segment net sales of $39,641,000 in the first quarter fiscal 2010 decreased 20.1% from first quarter fiscal 2009 net sales of $49,636,000. The $10.0 million decrease in Lighting Segment net sales is primarily the result of a $1.0 million or 5% net decrease in lighting sales to our niche markets (petroleum / convenience stores, automotive dealerships, and quick service restaurants) and national retail accounts, and a $9.0 million or 29.1% decrease in commissioned net sales to the commercial / industrial lighting market. Sales of lighting to the petroleum / convenience store market represented 29% and 17% of Lighting Segment net sales in fiscal years 2010 and 2009, respectively. Net sales of lighting to this, the Company s largest niche market, were up 37.6% from last year to $11,515,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Lighting Segment s net sales of light fixtures having solid-state LED technology totaled $7.3 million in the first quarter of fiscal 2010, representing over a 450% increase from last year s first quarter net sales of solid-state LED light fixtures of $1.3 million.

Graphics Segment net sales of $22,097,000 in the first quarter of fiscal 2010 increased 4.5% from fiscal 2009 net sales of $21,136,000. The $1.0 million increase in Graphics Segment net sales is primarily the result of image conversion programs for three petroleum / convenience store customers ($4.6 million increase) and a national drug store retailer ($0.3 million increase), sales of solid-state LED video screens to two sports market customers (netting to a $1.6 million increase), and changes in volume or completion of other graphics programs. These identified increases were partially offset by decreased net sales to certain other customers, including a reimaging program for a grocery customer ($3.0 million decrease). Sales of graphics products and services to the petroleum / convenience store market represented 43% and 32% of Graphics Segment net sales in the first quarter of fiscal years 2010 and 2009, respectively. Net sales of graphics to this, the Company s largest niche market, were up 46% from last year to $9,450,000. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company. The Graphics Segment net sales of products and services related to solid-state LED video screens and LED lighting for signage totaled $9.6 million in the first quarter of fiscal 2010, representing approximately a 43% increase from last year s first quarter net sales of solid-state LED light fixtures of $4.9 million.

At September 30, 2009, the Company had working capital of $74.7 million, compared to $72.5 million at June 30, 2009. The ratio of current assets to current liabilities was 4.38 to 1 as compared to a ratio of 4.70 to 1 at June 30, 2009. The $2.2 million increase in working capital from June 30, 2009 to September 30, 2009, which was influenced by the acquisition of AdL Technology, was primarily related to increased net accounts receivable ($6.2 million), and increased inventory ($4.6 million), partially offset by decreased cash and cash equivalents ($4.7 million), increased accounts payable ($2.5 million), and decreased other current assets ($1.2 million). The Company has a strategy of aggressively managing working capital, including reduction of the accounts receivable days sales outstanding (DSO) and reduction of inventory levels, without reducing service to our customers.

The Company generated $0.6 million of cash from operating activities in the first quarter of fiscal 2010 as compared to a use of $3.2 million in the same period last year. This $3.8 million increase in net cash flows from operating activities is primarily the net result of less net income ($1.1 million unfavorable), less of an increase in accounts receivable (favorable change of $4.1 million), an increase rather than a decrease in inventories (unfavorable change of $4.0 million), less of a reduction in customer prepayments (favorable change of $0.9 million), an increase rather than a decrease in accounts payable and other (favorable change of $3.9 million), a larger increase in the reserve for bad debts (favorable $0.1 million), a larger increase in obsolete inventory reserves (favorable $0.1 million) and no increase in deferred income tax assets rather than an increase (unfavorable $0.1 million).

The Company used $1.8 million of cash related to investing activities in the first quarter of fiscal 2010 as compared to a use of $0.5 million in the same period last year, an unfavorable change of $1.3 million. One of the changes between years relates to the amount of fixed assets purchased, $1,133,000 in fiscal 2010 as compared to $475,000 last year ($0.6 million unfavorable). Spending in both periods is primarily for tooling and equipment. The other change between years relates to the fiscal 2010 acquisition of AdL Technology, net of cash received ($0.7 million unfavorable) . The Company expects fiscal 2010 capital expenditures to be approximately $3.0 million, exclusive of business acquisitions.

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